“The money helicopter has arrived,” Claire Jones writes in her FT Alphaville post, citing Hong Kong Finance Secretary’s announcement of a handout of HKD 10,000 to each permanent resident in the city.
As a Hong Konger who loves to read online monetary economics discussion, I was puzzled when I read the post.
Why is that helicopter money, I asked myself, worrying I have long mistaken the definition of it.
“Fiscal handouts financed by new money creation rather than either taxation or bond issues,” monetary economist George Selgin defined helicopter money on a tweet this way. This is also the definition I have long taken for granted, as many economists have used the same definition in arguments before.
Still, I think it would be more reassuring to check what is the going Helicopter Money definition on FT Alphaville. “Koo on why helicopter money just won’t work”, a 2017 article by Alphaville editor Izabella Kaminska, seems like a promising one. Kaminska cited an report by Nomura’s Richard Koo , saying there are four implementations of helicopter money, and the forth one is:
The fourth and final option, according to Koo, is handing over cash directly to consumers without requiring it to pass through financial institutions. This could involve distributions by something like mail.
Hey, isn’t it what Hong Kong government going to do? (Well, as a matter of fact, no. The HKD 10K will be transferred into the resident’s bank account after registration. But, it’s close… right?)
However, if we look at the simple facts about Hong Kong monetary and fiscal finance system more seriously, the whole thing will become crystal clear.
First thing you need to know is, Hong Kong use fixed exchange rate system with a currency board, where every HKD 7.8 issued is backed by USD 1 in the Exchange Fund, managed by Hong Kong Monetary Authority (HKMA), the de facto central bank of the city.
Second, when Hong Kong government books a fiscal surplus, the money will go to the fiscal reserves placed under the Exchange Fund. The arrangement is for the centralisation in the investment management of public funds which helps maximise return, and also to enhance the resources available to the Exchange Fund in achieving the purposes for which it is established – maintaining the stability of the linked exchange rate of HKD.
Third, how much fiscal reserves does Hong Kong government has now? After years of fiscal surplus accumulated, it has fiscal reserves of about HKD 1,100 billion, according the the latest budget.
For comparison, the handout to about seven million people will cost about HKD 71 billion only, and the whole year of budget deficit will be HKD 139.1 billion, which is itself a record high.
What do they mean? Well, the fiscal reserves, aka the accumulated fiscal surplus from the past, is about eight times this year’s deficit, and 15.5 times of the whole expense of the “helicopter money” payout.
So, I think I can easily say that the so-called helicopter money is in fact wholly financed by past tax revenue the government received, which is totally fiscal, right?
It is like a tax rebate. Do you think tax rebate, even if they mail the cash to you, is helicopter money?
If you want a simple answer, you can end here and be satisfied. Problem solved! But in fact I have some more technicalities to offer which is more sympathetic to the helicopter money argument.
Here we go!
So how does Hong Kong government draw money from the fiscal reserves? Well, I am not 100% sure about how they will do it this time, but in 2004, Joseph Yam, the Chief Executive of HKMA back then, wrote an article explaining there are three ways to do so.
The first option is, I bet Claire would like this, for the HKMA to “print” money to pay back the government. (More precisely, “to create the money by crediting the required amounts to accounts the Treasury is maintaining with commercial banks through crediting the clearing accounts that those banks are maintaining with the Exchange Fund..”)
Create the money out of thin air, that is. Yet, Yam said HKMA won’t pick this option, as “[t]his would amount to increasing the Aggregate Balance of the banking system without increasing correspondingly the US dollar assets backing it. This is not allowed under the rules of the Currency Board System.”
Too bad, but there is still option two! Sell the USD in the Exchange Fund to raise the HKD required by the government.
This maybe the closest to “helicopter money”, I think, as in a way, very indirect one, the HKMA is handing its USD to every residents. From a “central bank’s money” to the “people’s money”! If you defined helicopter money this way, you will see a helicopter…
Except… if you are serious about helicopter money, you will see that the no new HKD is necessarily created in the process, and in fact the Exchange Fund is getting smaller as it holds less reserve assets now.
Also, in 2004, Yam said the preferred option is number three – “borrow Hong Kong dollars from the market.”
The reason is that “the investment return of the US dollar assets we are holding, for example US dollar deposits, is significantly higher than the cost of borrowing Hong Kong dollars.”
He went on to say that, “Hong Kong dollar interest rates in the interbank market are very low because of the large size of the Aggregate Balance. For overnight money, the interest rate is near zero, while we are earning over one per cent for liquid US dollar assets.”
I am not sure if HKMA will still prefer to borrow from interbank market, given the overnight HIBOR is 1.2% while SOFR is 1.59%, hard for me to say if the spread is good enough.
Anyways, without new fiat money created, I am not sure why one would want to call it helicopter money.
But maybe one can try convincing the Hong Kong government to rent a helicopter to do the handout? Maybe it can cheer us Hong Kongers up, at least for one fine afternoon?
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